Equity markets in EM economies have surged at a breathtaking speed in the last decade. After hovering around 20-25% of GDP for most of the 1990s, EM’s stock market capitalization, as a share of collective GDP, has strongly increased from 2000 to 2007. From late 2007, the global recession caused a sharp correction in EM share prices that continued throughout 2008. There was a recovery in 2009 and 2010 and since then collective capitalization ratio (stock market capitalization as a share of GDP) for developing markets has been around 40%.

According to Ernst & Young’s Moving towards the mainstream report, produced in collaboration with the Ernst &Young /SKOLKOVO Institute for Emerging Markets Studies, in the future, even if emerging market capitalization only grows in line with GDP, by 2030 it could account for as much as half of the world total. However, this could happen as soon as 2020 if the markets develop with greater speed as there would be increased equity issuance and a higher number of initial public offerings.

The main challenges for investors in EM stock markets have been variation and volatility. EM markets have proved to be much more sensitive to global economic forces than developed markets and have offered significant variation in returns. Markets in emerging nations are generally riskier than those in developed nations and volatility is a real problem for the investor. However, despite the high volatility, EM markets offer diversification benefits through exposure to different economic sectors and different stages of the business cycle.

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